Although you nearly always leave too much for the next buyer.
If you're a value investor, you may have noticed a disturbing trend of late; the shares you've sold have continued sharply upwards after you've sold.
You'll hear and read about lots of ways around this "problem". "Let the trend be your friend" is an oft-quoted stock market maxim that has nothing whatsoever to do with value investing. Stop-losses, meanwhile, have some validity in certain circumstances, but are dangerous tools to rely on -- and in many (but not all...) cases simply don't work in reality.
The simple fact is that if you are a value investor, there will be many occasions in which you will see the shares you've sold continue on to giddier heights than you thought possible; this is your investing lot which must be accepted -- unless you see yourself as some other kind of investor or trader of course.
A good example
As a specific example, eight weeks ago, I perceived value in fast-growing fabless semiconductor company CSR (LSE: CSR).
In CSR's case, I thought the company offered the best of both worlds; value in that half of its overall valuation was covered by pure cash which made the price-to-earnings unfeasibly low against enterprise value -- and some excitement by virtue of the fact that the company is growing quickly.
As I write, the shares are 414p -- up over 27% in less than two months. So I would say that one of those two worlds has now all but disappeared -- i.e. that of the basic value as the shares are now more reasonably priced and reliant more on actual performance than balance sheet strength.
I'm not saying for one moment that CSR is an out and out sell; merely that the absolute basic value which was there for the world and his wife to see in November has now been realised.
More right than wrong
The main reason the shares have risen sharply was a litigation settlement reached last week, with California-based Broadcom which ended a long-running battle between the two chip makers – though the planned takeover by Qualcomm of Atheros Communications in the US shook the sector up a little.
So the good news has now seen the main value go. From here, it's a judgement call on earnings more than value. In this case, it happened quickly due to unforeseen circumstances -- usually it takes more like two years or more, rather than two months!
The fact that that value has been realised due to circumstances that no-one who doesn't have inside information on the company could have foreseen is irrelevant. One way or another such value will come out in more circumstances than not -- and so value investors win out over time.
They don't get them all right by any means, but they generally win more than they lose and investors, we can't ask for much more than that.
Selling too early?
That said, history has taught me that I generally sell too early, as I'm too pessimistic in my analysis of a company's worth. This kind of under-valuation comes readily to those of us who seek value by nature. And I believe it is worth tempering one's judgement a little on the upside -- which is what I've been trying to do of late.
Overall, the best policy is to listen to company-specific news -- and only that, when markets are in decline.
When they're rapidly rising, listen to the news and look at valuations. If a share is moving up quickly -- whether or not this is part of a wider bull market -- it may be time to sell.
In other words, even if you simply got lucky by buying your selection just as the market turned bullish, then your perception of underlying value may have been realised purely by overall sentiment.
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